Sunday, August 10, 2014

Tragically, the inability of our institutions to impart the skills required by the emerging economy hobble not just the unemployed but employers.

A reader recently offered a compelling reason why total compensation costs (wages plus benefits/payroll taxes) could rise even in a stagnant economy with millions available for work: many of those who have been out of work for a long time (or have yet to hold a formal job) are unqualified by experience and professionalism to perform the work that is available.

This is a complex topic, so let's separate the key issues.

1. Inability to perform the available work successfully on a sustained basis is a problem across the entire spectrum from low-skill to high skill. On the face of it, just about anyone who isn't disabled should be able to do low-skill farm labor such as harvesting fruits and vegetables, etc.

But anecdotal evidence suggests many unemployed Americans are incapable of doing this kind of demanding physical labor on a sustained basis: stories abound of native-born Americans working in the fields for a few hours or days and then giving up.

At the higher-skill end of the spectrum, those who have been out of work for years may find that their skillset has been leapfrogged by technology, and it's cheaper/more efficient for employers to poach workers from competitors than it is to train workers who lack the specific skills needed.

Though it may seem counter-intuitive to non-employers, it's actually cheaper and lower risk to pay a higher salary to poach a competitor's employee because you can be confident the employee can start producing value on Day One, where if you hire a long-unemployed worker, you are taking the risk the person has lost the ability to perform at a high level, and you're taking on the expense and time required to retrain them.

Training takes time and investment, and it's easier to hire employees from competitors than invest the time/money in training new employees.

2. Ageism. Ageism cuts both ways: Baby Boomers are clinging on to their jobs rather than retiring because they need the higher income. In jobs with tenure (such as virtually every government or union job), this trend ties employers into paying the highest wage scale and healthcare costs because it's generally illegal to force someone to retire against their will.

On the other end of the scale, older workers often find employers prefer younger employees--not just because they will accept lower wages (and lower healthcare costs) but because the employers may assume their skills are more up to date.

Anecdotally, sectors dominated by tenure/union contracts will experience higher total compensation costs as their workforce clings to their jobs as they age.

3. Work is more demanding than ever. The pool of people claiming to want work appears large, but the demands made on employees is rising constantly as corporate employers seek higher productivity. A significant number of people are simply unable to perform the work at the sustained level of productivity required nowadays.

An employee who could keep up 20 years ago or even 10 years ago may fall behind in today's work environment.

We might recall the 80/20 Pareto Distribution here: as a rule of thumb, 20% of employees are responsible for 80% of the department's output/sales (this is not exact, but it is nonetheless remarkably accurate).

Employers are willing to bid up compensation for the top 20% who generate the majority of the output/sales, etc.

4. Healthcare costs are still soaring for employers. While a few data points suggest total healthcare spending has leveled off, this is likely the result of ObamaCare pushing the first $5,000 of expenses onto the "insured" with Bronze Plans.

(If "healthcare" requires ponying up $5,000 in deductibles, how is that even "insurance"? In my view, is it a simulacrum of insurance.)

In other words, now that they have to pay the first $5,000 for care in cash, people are not going to the doctor.

Meanwhile, employers are getting stiffed by much higher premiums. Using my own bare-bones coverage as a baseline, my monthly healthcare insurance fee has shot up about 20% in the past two years. Plans with better coverage increased even more.

Unknown to most employees, there is a tax in ObamaCare paid by employers. That raises total compensation costs even though employees don't see it in their paychecks.

5. Slashing head count has reached marginal returns. The majority of corporate employers have already outsourced/automated the low-hanging fruit of their labor force, and what's left in the U.S. remains for a reason: it serves the U.S. market or does work that produces high value (for example, managing overseas divisions, designing products made overseas, etc.)

So we have a diminishing number of jobs that can be outsourced and a diminishing number of qualified people who can do the work.

6. Minimum wages are rising in many locales as higher costs outstrip entry-level earnings. Rather than engage in the debate over whether higher minimum wages are good or bad, let's stipulate that minimum wages are rising a a number of communities, and in aggregate, this pushes compensation costs up.

It's un-PC to say out loud than many of the unemployed are unhireable because they lack the basic "people skills" of professional manners, the desire or ability to learn, the willingness to persevere and prove their worth to employers, etc.

This pressure to be politically correct inhibits an honest discussion of the disconnect between graduates from high school and college and the skills, values and professionalism needed by employers.

Those without these basic skills have a tough time qualifying for any job, even an entry job in retail or fast-food service.

I fault our dysfunctional, disconnected education system for this failure to teach the basic skills of being employable. Fortunately, anyone can learn these skills on their own, but this is a process that demands a lot of potential employees: self-awareness, perseverance, a willingness to seek out mentors and community-based (often unpaid) work to acquire skills and connections, etc.

To sum up: let's say there are 15 million people who say they want work. But maybe only a few million actually have the skills, values and experience in hand to qualify for the jobs that are available.

That mismatch--in addition to the other factors listed above--could push total labor compensation costs higher even in an economy that appears to have a lot of slack in its labor market.

Personally, I don't see how any small-business employer could afford to hire anyone but those in the top 20% of work ethic, accountability, honesty, willingness to learn new skills, communication skills, etc.

Despite an abundance of lip-service paid to entrepreneurial skills, it seems our educational institutions have largely failed to pass on these skills, which are alien to protected bureaucracies such as those of institutionalized education. To ask a bureaucrat who is forced to adhere to a bunch of disconnected-from-the-real-world guidelines to "teach" entrepreneurism is to ask the impossible.

Tragically, this inability of our institutions to impart the skills required by the emerging economy hobble not just the unemployed but employers. As a result, I see labor costs rising in the years ahead despite an apparent surplus of people willing to work.

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